21 FEBRUARY 2018 - 17:27 by DAVID FICKLING

Excavators and drillers at work in an open pit copper and cobalt mine in the DRC. Picture: REUTERS

Sydney — An isolated African nation possesses unique deposits of a rare and valuable metal. Its leaders aim to nationalise mineral wealth, while a white South African trader seeks a more vigorous export market. Inevitably, resources bring tragedy as well as triumph. With great power comes great responsibility.

If that sounds like the plot of the current box-office smash Black Panther, it has a real-world echo.

The Democratic Republic of Congo (DRC) has an endowment of cobalt scarcely less outsized than the fictional Wakanda’s reserves of vibranium. With the rise of electric vehicles forecast to increase demand for the battery material more than fourfold and cobalt prices tripling over the past two years, the paralysed, election-dodging government in Kinshasa is weighing a 150% increase in mining royalties.

Those levies may threaten the plans of Ivan Glasenberg, CEO of the world’s biggest cobalt producer, Glencore, who wants to double production from the company’s Congolese mines.

Black Panther’s depiction of an African kingdom that used resource wealth to become the most advanced society on earth is enticing because it’s superficially plausible. Five of the 10 richest countries on the planet are oil states; the glittering skyline of Wakanda’s capital Birnin Zana resembles few places so much as the skyscraper forests of Dubai, Doha and Riyadh. So why shouldn’t life imitate art?

There are three reasons to be cautious about the prospects for cobalt to follow vibranium’s path.

Material matters

One thing stands out about the countries that have grown super-rich on resource wealth: They’re all petro-states

Centuries of copper mining have only raised Chile to the level of Kazakhstan and Croatia in purchasing-power terms. Indonesia’s world-beating endowments of gold, coal, nickel, tin and copper have resulted in an income per capita somewhere between Albania and Tunisia.

One reason for that contrast is that it’s seriously difficult to find substitutes for petroleum. The transition from fossil fuel to electric vehicles, from which cobalt hopes to benefit, could be one of the most wrenching changes global commodity markets have ever seen.

While it’s hard to find an alternative to cobalt, it’s no petroleum. The most likely way the world will escape potential shortages will come down to tweaking battery chemistry to reduce consumption of the metal. That won’t help the Congolese hoping to profit from increased sales.

Scaling up is hard

Those petro-states also stand out as having tiny populations. It’s notable that the most populous Gulf state, Saudi Arabia, is also off the leader board in terms of purchasing-power per capita.

That matters, because the DRC is sub-Saharan Africa’s third-most-populous country. Let’s make the ambitious assumption that cobalt production increases fourfold by 2025, while prices double. Instead of the maximum 5% royalty that is being proposed under the new rules (up from 2%), let’s assume for the sake of argument that every cent of cobalt revenue is distributed back to the population. Such a scenario would still only result in annual checks of $420 or so going to each DRC citizen.

A cobalt boom and national dividend would clearly generate some positive indirect effects in terms of employment and microfinance-style household investment — but it’s unlikely to be enough on its own to lift the DRC from its status as one of the poorest nations on earth.

Institutions are crucial

As economists led by Mutiu Abimbola Oyinlola of the University of Ibadan argued in a 2015 paper, the quality of government institutions is a crucial determinant of whether resources become blessings or curses.

Sub-Saharan Africa has suffered from the resource curse more than any other place on earth, and it’s hard to disentangle that fate from the legacy of colonialism and corrupted institutions the fictional Wakanda escaped.

The DRC owes its current borders to King Leopold II of Belgium’s famously brutal colony, the inspiration for Joseph Conrad’s novel Heart of Darkness. The state lumps together the Luba — the ethnic group from which President Joseph Kabila hails, and whose homelands include the cobalt-rich copper belt around the southeastern Katanga province — with a range of often antagonistic groups to the north and west.

The DRC’s first civil war in the 1960s was driven in part by Katanga’s attempts to secede, and its latter one in the 1990s and 2000s — the most devastating conflict since the Second World War — devolved rapidly into a battle among warlords and neighbouring states for access to conflict minerals.

That’s the reason to be most sceptical that Kabila’s proposed royalty increase will move the needle on development. Current levies are pretty low by global standards but reflect the extreme political risk of operating mines in a country that’s teetering on the edge of renewed conflict, where corruption is endemic, and where Kabila himself remains in office more than a year after he was meant to step down.

The idea that increased mineral taxes would contribute to development seems laughable in a country that’s a byword for kleptocracy.

The best lesson to draw from Black Panther is that while mineral deposits can bring in cash, on their own they’re not enough. The real wealth of Wakanda wasn’t vibranium, but wise government.

• Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. This column does not necessarily reflect the opinion of Bloomberg and its owners.


Source: https://www.businesslive.co.za/bd/opinion/2018-02-21-while-growing-in-demand-cobalt-is-no-petroleum-and-the-drc-should-be-cautious/